Verdict: Unequitable Pricing
Equitas Small Finance Bank (SFB) is launching a Rs. 518 crore IPO on Tuesday, 20th October 2020, nearly half via fresh issue of up to Rs.280 crore and other half via an offer for sale (OFS) of up to 7.2 crore equity shares by listed promoter Equitas Holdings (holdco), in the price band of Rs. 32 to 33 per share. Issue will close on Thursday, 22nd October with listing likely on Monday, 2nd November.
10% of issue is reserved for shareholders of Equitas Holdings for whom no discount is offered, although was to be considered as per 11th Oct 2020 RHP. Last year, Ujjivan SFB had offered ~5% discount to parent’s shareholders.
Inappropriate IPO Structuring:
IPO is being undertaken only to comply with RBI’s licensing norms for direct listing of bank, and not via holding company, the 4th Sept 2019 deadline for which has already been breached and penalties of CEO salary cap and embargo on opening certain new branches exists as of date.
Bank does not need fresh capital (which accounts for over half the issue), as capital adequacy ratio is very healthy at 22% (against 15% minimum requirement). Instead focus should have been on the OFS portion, which, to the contrary, has been reduced by 10% from 8 crore shares, as per Dec 2019 DRHP to 7.2 crore shares now. Promoter Equitas Holdings currently owns 95.5% stake, which will reduce to ~ 82% post listing of the bank, which needs to be further trimmed to 40% by as early as Sep 2021, 30% by Sep 2026 and to 26% by Sep 2028. Thus, promoter stake reduction will remain a big overhang on the stock post listing, as was seen for Bandhan, Kotak in recent past.
Financials Trail Peers:
Equitas SFB’s loan book of Rs. 14,400 crore (30-6-20) is split 45% as small businesses loans, 25% micro finance, 25% commercial vehicle loans, with 54% concentrated in home state Tamil Nadu alone. As of 31.8.20, as much as 36% of loans were under moratorium, with 83% collection efficiency, the weakest being commercial vehicle segment, as over 60% loans are in metro/urban areas, where post-covid recovery is likely to lag rural India. Also, net NPA of 1.45% is much higher than SFB peers AU (0.62%) and Ujjivan (0.18%).
Aggressive Pricing, on All Counts:
At Rs.33 per share, Equitas SFB’s market cap will stand at Rs. 3,756 crore, leading to PBV multiple of 1.2x on BVPS of Rs. 26.6 (30-6-20) which is aggressive in relation to Ujjivan’s 1.7x given (i) higher net NPA (ii) 50%+ advances concentrated in single state vs Ujjivan’s < 30% in entire South.
On 11.12.19, Equitas SFB raised Rs. 250 crore via private placement to IIFL Funds at Rs 52.68 per share, when share price of holdco Equitas Holdings was 106 i.e. last transacted price was at 50% discount. Applying the same discount on Equitas Holdings’ current market price of Rs. 50 works out to a price of Rs. 25 for Equitas SFB. Thus, despite covid-induced slowdown, current IPO price is extremely stretched, especially when the sector is not yet out of the woods.
Last 1 year banking IPOs have disappointed investors, with CSB bank ruling below listing price and Ujjivan SFB below its IPO price too. Even return from holdco Equitas Holdings has been extremely poor as share price has halved from April 2016 IPO price of Rs. 110. Attraction for banking license has diminished due to on-tap guidelines, while risk aversion towards small banking stocks has only risen. Moreover, recent IPO listings have been a mixed bag, with some like UTI AMC at discount or premiums shrinking in Route Mobile after anchor lock-in expiry.
IPO purely to comply with listing requirement, high overhang of promoter stake sale, tremendous competition keeping outlook for smaller banks weak and aggressive pricing make this IPO a clear avoid.
For these very reasons, we do not recommend any arbitrage play in parent Equitas Holding as holding company discount may remain high.
Grey Market Premium (GMP) of Equitas Small Finance Bank: Grey Market Premium is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’ in Pathshala column.
Disclosure: No Interest.